Managing Athlete Spokesperson Risk in Times of Crisis: Lessons Learnt

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Managing Athlete Spokesperson Risk in Times of Crisis:

Lessons learnt from the Michael Phelps & Tiger Woods cases

Lauren Sedgman

School of Economics and Business, the University of Sydney, Australia

ABSTRACT:

Sponsorship is the fastest growing form of advertising by consumer firms, representing a total of US$44 billion worldwide forecasted to grow by 4.5% in 2010 (IEG, 2010). The increase in sponsorship by consumer firms necessitates a corresponding increase in risk management policies to guard against the potential damage of negative spokespeople events to shareholders. This paper examines flaws in existing risk management practices and the detrimental impact of negative spokesperson events on the firms sponsoring both Michael Phelps and Tiger Woods. This paper offers lessons for managers seeking to reduce the uncertainty associated with the management of multi-brand athlete properties in times of crisis.

Key words: Managing Uncertainty, Marketing and Communication, Intangible Assets, Risk Management, ANZAM 2010 Page 2 of 28

ANZAM 2010 Conference Paper

MANAGING ATHLETE PROPERTIES

INTRODUCTION

Growth of Sponsorship and Athlete Behaviour

It has been said that “managers face uncertainty, and investors face risk” (Sull, 2006). Since the behavior of athlete properties is highly uncertain, managers of firms employing intangible assets such as athlete properties face significant uncertainty. Sponsorship is the fastest growing form of advertising by consumer firms, representing a total of US$44 billion worldwide forecasted to grow by 4.5% in 2010 (IEG, 2010). The increase in sponsorship funding necessitates a corresponding improvement in risk management policies to guard against the potential damage of negative spokespeople events. Negative spokespeople events for the purpose of this paper are defined as any behavior or activity involving the company spokesperson that contributes poorly to public opinion, whether as a result of their direct actions or indirect involvement. Recognizing these considerable risks to consumer brand equity, firms must be able to adapt, pre-empt or absorb spokesperson risk.

Negative Spokespeople Events and Potential Damage to Firm Reputation

Managers must address the risk management deficit in the supervision of sports properties to protect the financial position of the firm and its shareholders. By undermining reputation value, negative spokespeople events can destroy shareholder wealth, brand equity, and earnings potential (Knapp, 1999). In the month following Tiger Woods’ scandal, shareholders of his sponsored firms lost an estimated US $12.37 million following revelations of his extra marital affairs (Knittel and Stango, 2009). Reduced brand equity has further negative financial effects and can increase the debt-holder risk the cost of capital to the firm (Rego et al., 2009). By reducing spokesperson risk and protecting brand equity the firm can reduce its exposure debt-holder risk and the cost of capital.

Athlete properties

Athlete or sports properties refer to the brand equity inherent in the performance and popularity of an athlete or sporting organisation. Firms seek to employ sports properties to leverage the positive value of this brand with their corporate brand. A corporate brand is a “declaration of what it is and what it 1

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believes” (Knapp, 1999). Brand equity by extension refers to the value that the company’s name, vision and actions extracts from the consumer or the economic value “beyond the physical assets associated with its manufacture or provision” (Aker and Biel, 1993). Thus, “every corporate action sends a message that either reinforces the brand and releases earning power, or misdirects it and invites earnings risk” (Knapp, 1999).

Logic for Engaging Athlete Properties

Athletic spokespeople add value if managed correctly. This paper will argue that as with any other alliance it is the firm’s responsibility to manage this alliance of brands (firm & athlete) to reduce reputational risk, in this case due to negative spokespeople events. Furthermore, this paper will identify the existing flaws in the current application of risk management policies to sponsorship assets; including the overreliance upon athlete agents and the corporate attitude that spokesperson risk is a necessary ‘cost of doing business’. By addressing the unsystematic risk of negative spokespeople events, this paper highlights important considerations for firms sharing an athlete property to minimise the uncertainty. This supports the manager’s main responsibility of protecting and maintaining shareholder value.

Positive Impact of Sponsorship on Consumer Behaviour

Consumers are affected by a multitude of factors when making the purchasing decision. Considerations such as price, quality, and utility are obvious factors, but consumers are further impacted by the opinions of influentials or “individuals who influence an exceptional number of their peers” (Dodds and Watts, 2007). Athlete properties have a powerful influence on potential consumers as a result of their ‘star quality’ and in turn, purchasing decisions. Yet, cascades of influence are driven not solely by “stars” or “influentials”, but also a critical mass of easily influenced individuals (Dodds and Watts, 2007). Thus it is a combination of “opinion leaders” and these easily influenced individuals who form and impact public opinion (Dodds and Watts, 2007).

Athlete properties or spokespeople are important influentials in communicating the corporate message, and their actions positive and negative respectively release and destroy earning power. Negative spokespeople events interrupt the brand message and consequently affect how the consumer interprets the brand.

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LITERATURE REVIEW

Evolution of Sponsorship: From Endorsements to Athlete Properties

The 1960s model of athletic sponsorship primarily took the form of direct advertising, product placement or endorsements. Zygman (2001) sees an important distinction between endorsements and spokespeople with the former giving credibility to the product as they are users of it, whereas spokespeople vouch but may not use the product. Firms focused on developing a cause and effect relationship with consumers by connecting perceptions of product quality with successful athletes. For example, the firm’s products gained credibility and legitimacy with consumers by virtue of the fact they were used by the world’s best athletes.

In the 1970s athletic sponsorship developed beyond implied causal links into the patronage of high performance athletes, furthered by televised broadcasting of popular sporting matches (Black, 2010). The impact of star players increased TV ratings and game attendance (Hausman and Leonard, 1997). By the 1980s athletic sponsorship became a key marketing strategy for large multinationals. However, it remained an experimental investment that was not pursued by many mid-tier consumer firms as the benefits of sponsorship were not proven (Amis and Cornwell, 2005).

Competing perspectives on the Sponsorship relationship.

Critics of the sponsorship relationship suggest that whilst they are an important communication method, they lack a synergy between partners which in turn undermines the return on investment (Zygman, 2001). In particular Zygman (2001) finds traditional philanthropic connotations render the relationship a one- sided and exploitative financial arrangement.

Competing perspectives suggest that sponsorships if managed successfully can generate a competitive advantage and apply the resource based view to find that sponsorship releases above average returns in market share and profitability (Fahy et al., 2002). The potential marketing value of sport sponsorship is considerable “if treated as a potentially valuable resource- with the appropriate consideration given to heterogeneous distribution, inimitability, lack of mobility and the inevitable ex ante limits to competition” (Amis and Cornwell, 2005). Sponsorship can release competitive advantage for the firm in two markets;

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athletic properties and product markets. Consumer firms dependent upon a portfolio of high profile athletes can leverage this competitive advantage in the sponsorship market to acquire new athlete properties.

Strategic Analysis: Athlete Sponsorship as an Alliance?

Sponsorship has been framed as a strategic alliance since both partners are able to co-invest to further the attainment of their own strategic goals (Fahy et al., 2002). A strategic alliance is a “close, long-term, mutually beneficial agreement in which resources, knowledge and skills are shared with the objective of enhancing the competitive position of each partner” (Urriolagoitia and Planellas, 2007). The firm may receive an increase in brand awareness, market share, brand equity or access to new markets. The athlete property receives predominantly financial and technical assistance to help them pursue their sporting objectives. Trust is a necessary pre-condition for an effective alliance but it is not sufficient to sustain it.

The literature surrounding sponsorship risk is largely confined to alliance partner selection, management of the alliance and what constitutes an effective sponsorship alliance. However, little consideration is given to the firm’s management of the sports property, the prevention of spokesperson risk and spokesperson crisis management. Firms are over reliant upon trust as the basis of the alliance (Farrelly and Quester, 2005), and have outsourced the preventative risk management function to athlete agents in monitoring, and constraining the behavior of sports properties.

Outsourcing Reputational Risk Management and the Agency Conflict presented by Athlete Agents

Athlete agents are the primary managers of spokesperson risk. Agents act on behalf of the athlete and manage ‘day to day logistics’, influence professional athlete career planning and negotiate endorsement contracts to provide the athlete with a “recurrent stream of income” (IMG, 2010). Agents are incentivized to keep their property employed in valuable endorsement deals as their remuneration depends on the success of the property (Martino, 2009). Given this commission structure between athlete property and agent, it can be argued that firms have informally outsourced the risk management function of sports properties to athlete agents. Agents contain athlete’s behavior within the parameters accepted by endorsing firms in order to keep the athlete in the alliance.

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However, agents are inherently conflicted in performing a sports property risk management function on behalf of firms. If successful athletes deem the agents to be interfering in their personal lives the athlete may seek alternative management (Forrester, 2010).1 While agents seek to prevent any negative behavior by athletes (which may compromise the longevity of the sponsorship alliance), they are unable or unwilling to risk losing the athletic talent to a competing agency. The value of the relationship with the athlete exceeds the value of the relationship with the firm. Thus, agents are conflicted by their remuneration structure to be able to effectively prevent negative spokesperson events on behalf of the firm.

Minimising and Managing Athlete Property Risk- Defining firm objectives

Spokesperson risk is unsystematic and inherent in sponsorship alliances. It cannot be ‘managed away’ and athlete agents are conflicted in their incentives and capacity to effectively prevent spokesperson risk. Trust is a necessary pre-condition for a sponsorship alliance. However, firms must clearly define what “unacceptable behavior” is, and have monitoring mechanisms and contractual consequences such as morality clauses in place for the breach of acceptable behavior. The monitoring of athlete behavior should not rely solely upon the athlete agent or the media, which effectively maximizes the negative spokesperson behavior but should be an in-house risk management function. Athlete properties should expect to be answerable for their conduct and managers must ensure their advertising investment is receiving the appropriate preventative risk management.

While spokesperson risk is unsystematic, it should not be dismissed as a trivial ‘cost of doing business’. Phil Knight, the founder of Nike states that “there is always a risk [with athlete endorsements]”, but this is “all part of the game” (AP, 2010). Such attitudes accurately reflect the uncertainty faced by managers, but does little to reassure investors that sponsorship risk and its damaging impacts are recognised as a serious concern by management. The Tiger Woods scandal cost investors of his sponsor firms a combined $12.37 million dollars or 4% off the face value (refer to Figure 1 in Appendix). As competition increases for athlete properties and in consumer markets risk-averse investors are unlikely to accept this ‘management defence’ and will consequently divest.

1 Olympic Snowboarder Shaun White left his management at IMG for Creative Artists Agency (CAA) in June 2010 following the disappointing management of his second gold medal victory. 5

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METHODOLOGY

This research adopts a case study approach, utilising both qualitative and quantitative analytical tools (Yin, 2003). Case studies allow rigorous testing of a hypothesis against available data, and is therefore “capable of examining simple or complex phenomenon, with units of analysis varying from single individuals to large corporations and businesses; it entails using a variety of lines of action in its data gathering segments and can meaningfully make use of and contribute to the application of theory (Yin cited in Berg, 2007).

A case study is defined as “a detailed examination of one setting [or] …one particular event” (Bogdan and Biklin, 2003). This will provide a preliminary response to the research question: “how do managers manage the spokesperson risk generated by athlete properties and minimize the impact on the sponsorship alliance?” . This case study approach will examine the negative spokespeople events caused by two athletes, compare the actions of the alliance partners and assess the impact on brand equity. The conclusions from this analysis will assist with developing practical management guidelines for firms engaged in sponsorship alliances.

This comparative case study hopes to partially address the inadequacies in the literature relating to risk management of sponsorship alliances. In particular, the literature on athlete properties and sponsorship alliances has lacked practical management relevance. This lack of academic attention is largely because of the high level of firm specificity impacting athlete selection, the sophistication of contract term and absence of meaningful risk management strategies. Firms are required to select, manage and terminate sponsorship alliances on a case by case basis. Athlete alliance crisis management is often not considered beyond contractual arrangements and requires the firm to draw upon the skills of marketing, public relations, finance and strategic advisors in a critically short time period. This both explains the limitations of existing literature, and reinforces the aptness of the case study approach in this field.

This paper offers case studies of two high profile athlete properties, Tiger Woods and Michael Phelps. These case studies were chosen because both athlete properties have comparable sponsorship value; offer category exclusivity to their sponsor firms (meaning that they do not receive sponsorship from two competing firms); and have positively impacted the brand equity of sponsor firms. The negative events

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associated with these athletes will be discussed from a firm perspective with a view to extracting lessons for managers facing similar circumstances.

A qualitative analysis of the case study identified major events (particularly the negative spokesperson incident and any statements by the athlete properties or sponsors) and media responses to the event. This allowed the identification of differences among firms’ risk management strategies, the speed of their response and the varying effectiveness of these approaches. These insights reflected the broader context of the alliance, particularly past behavior of the athlete property and the motivations for engaging the athlete property (i.e. role model versus athletic performance).

The qualitative assessment was substantiated with a quantitative analysis of the impact of the events on firms’ abnormal returns. The firms’ share prices and Index S&P historical data was collected from Google Finance for the fourteen days following the initial negative spokesperson event. This data was used to run the capital asset pricing model, a standard method of financial evaluation (Frino et al., 2006, Berk et al., 2010):

using the return on US Treasury bonds as the risk-free rate. The results of this analysis were expressed in percentage abnormal returns on the previous day. This was graphed both as a daily and cumulative return over the fourteen days subsequent to the negative spokesperson event and corresponding media responses, using Microsoft Excel 2007.

This illustrated the immediate impact of firm and athlete actions on shareholder and reputational value, brand equity risk and market uncertainty. The value of event studies is constrained by the dramatically differing market conditions, i.e. in the immediate aftermath of the global financial crisis of 2008 and subsequent recovery in 2009. However, the results generated still demonstrate support for the hypothesis and thus offer important insights for managers of athlete properties.

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COMPARATIVE CASE STUDIES

Tiger Woods

Golfer Tiger Woods epitomizes the branding trifecta: he possesses personal, firm and industry brand equity. Woods signed with Nike in 1998 for an undisclosed sum. The twenty-five year old won four PGA tours within 42 weeks of turning professional. In 2000 Nike re-signed Woods for a record US $105 million over five years (DiCarlo, 2004). The sponsorship deal was the largest ever offered, surpassing Nike’s previous record breaking deal with Michael Jordan (Brown, 2000). At US $105 million Woods was the highest paid sports property in 2009 (Schwartz, 2010). This fell to US $82 million in 2010 following his infidelities (Schwartz, 2010), which reflects his intrinsic value as an athlete property despite his transgressions.

At a firm level, Tiger Woods’s association with Nike enabled it to enter the golf market. Prior to their alliance Nike struggled to break into the saturated golf market dominated by entrenched firms such as Cobra, Callaway, and Taylor Made (Adelson, 1995). Golf also conflicted with Nike’s established sports portfolios as golf is perceived by consumers as being highly elitist, traditional, and technologically specialized (CNBC, 2008). The Tiger Woods alliance enabled Nike to put an approachable and successful young face on its new brand, engage with an increasingly popular sport, and eventually (as Woods’ success on the PGA tour evolved) become associated with the best athlete. Nike Golf now represents US $650 million sector for the sports goods producer (AP, 2010).

Woods has been credited as “single-handedly responsible for the explosion in the interest of golf” with the PGA consequently benefiting from the Tiger Woods brand (Lusetich, 2010). PGA events attract three times the amount of funding since Woods’ debut; in 2000 Prize money for the PGA tour was $302.5 million, and by 2008 it had reached $981 million (Lusetich, 2010). This led Lusetich (2010) to suggest that Woods “might just be the single greatest money spinner in sports history”.

The allegations of infidelity created great uncertainty for stakeholders in the Tiger Woods brand (refer to Figure 2 in Appendix for a timeline of events). Woods suffered the greatest fall in popularity of any nonpolitician from 83% in 2005 to 57% in 2009 (Bizzinger, 2010). At the time of the incident Woods was engaged in sponsorship alliances with Accenture, Gillete (Procter and Gamble), Nike, Electronic Arts,

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Gatorade, and Tag Heur. The car accident involving Woods and his wife on 27 th of November 2009 initiated speculation (Knittel and Stango, 2009), and the constant stream of women claiming to have relations with the golfer led the media on a quest to pursue every infidelity to its conclusion.

The reaction of Woods’ sponsors reflects varying approaches to risk management and can be categorized before and after Woods announced his break from golf. Gatorade was the first sponsor to terminate the alliance with Woods issuing a ‘pre-emptive’ strike on the 8 th of December (Figure 2, Day 12) in an attempt to outrun the public relations carnage as more women continued to come forward. The association with Woods was particularly damaging for Gatorade given the slogan “Is it in you?”.

Woods’ press release on the 11 th of December 2009 ( Figure 2, Day 15) announcing his “indefinite break” from golf), generated significant market uncertainty for remaining sponsor firms. Sponsor responses became concentrated in the two days following the apology, as Accenture terminated the sponsorship alliance whilst Tag Heur and EA Sports stated their desire to continue it.

Such collective actions acted to reduce market speculation and uncertainty, regardless of the position the firm took on the relationship and can accordingly be seen as co-operation amongst a network of firms sharing an asset. The “speech act” (Green, 2007), or act of making a statement, was far more crucial to the brand recovery than the position taken on the athlete alliance. This suggests that in times of crisis, the firm should carefully evaluate the properties’ ongoing role in the firm and communicate this to the market as quickly as possible. These “speech acts” shifted the burden of uncertainty to those sponsors yet to issue a statement on their future with the alliance. This burden of uncertainty may have significant ongoing financial consequences for publically listed firms and their shareholders who are subject to market volatility. In contrast, firms who had released a definitive statement on the future of the alliance freed themselves of this burden and were able to return to core business operations.

AT&T was the last sponsor to make a definitive statement on their future with Woods. They terminated the contract on the 30 th of December- the same day as Woods was admitted into sex rehabilitation. This strategy of ‘taking out the trash’ before the end of the year may have intended to allow the negative

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announcement to get lost in the ‘noise’ of the share market transition to the New Year. However, by the end of January the company had lost 11% of their opening share value of 2010.

Michael Phelps

Whilst the negative events surrounding Tiger Woods were unexpected, Michael Phelps typifies an athlete with a tendency towards predictable misdemeanors. Phelps has won fourteen Olympic medals, holds six world records (Vilacom, 2010), and at 24 is arguably the most successful swimmer in modern history. His sponsors include Speedo, Powerbar, Omega, Rosetta Stone, Visa and (formerly) Kellogg. Phelps’ success in the pool and appeal as a role model secured him multiple sponsorship contracts.

In 2004 Phelps was arrested for ‘driving under the influence’ as a minor. Phelps was sentenced to 18 months community service and issued an immediate public apology repenting of “the seriousness of this mistake”(Hancock, 2004). Despite the severity of the incident no sponsors left Phelps. In November 2008 Phelps was photographed smoking marijuana. The story broke on the 31 st of January. Visa was the first to issue a statement on the 3 rd of February in support of Phelps. This pre-empted Phelps’ public apology to the media on the 5 th of February. However, Kellogg terminated their contract with Phelps on the 6 th of February as “it was not consistent with the image of Kellogg” (Huffington Post 2009), who sponsored other more’ family friendly’ athletes such as snowboarder Lindsey Jacobellis (Saletta, 2005).

It appears that taking drugs was viewed by the firm to be more damaging to the brand than driving whilst intoxicated. Terminating the alliance with Phelps over marijuana but not driving under the influence communicates a double standard as both are illegal drug-related behaviours. This was recognized in the media underscoring the fact that firms employing athlete properties as role models must be clear and consistent with the behavior they will accept.

Phelps’ behavior suggests that upon returning from Olympic competition he is prone to misbehave. Phelps’ sponsors in the lead up to London 2012 should review the contractual ‘morality clause’, or perhaps consider a bonus for good behavior, as well as a performance bonus. He has been offered sponsorship for both his sporting prowess and his consequential status as a role model: the alliance should

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reflect those dual elements. Phelps’ two previous felonies render him likely to misbehave and thus ‘uncertain’ to managers and ‘risky’ to investors. Thus sponsor firms must consider if they can absorb the risk of Phelps’ misbehavior that historically accompanies his success.

The quantitative analysis suggests that making a statement ameliorates the impact of the negative spokesperson event. In Figure 1, a pronounced spike is apparent for each company after a relevant statement was made, i.e. after Visa’s announcement that the company would to continue to endorse Phelps (Day 4), and Kellogg’s decision to drop Phelps (Day 7). The capital asset pricing model utilises share prices and the risk premium: therefore, although the data is clouded by volatile financial markets, making a statement does appear to have an immediate and positive impact on shareholder value.

LESSONS AND RECOMMENDATIONS

Each case study differs in the value provided by the athlete property, the nature of the negative spokesperson event and the type of firm response. Accordingly, these examples offer different insights when managing uncertainty and risk surrounding such intangible assets.

Crisis Prevention: Can you legitimize athlete misbehavior? The crisis management response to negative spokesperson events is dictated by two key factors. Firstly, the purpose for which the property was selected is critical. Firms selecting athletes based upon their sporting success rather than as a role model face reduced spokesperson risk. The fact that Woods and Phelps remain the best athletes in their respective fields enables sponsor firms to legitimize their continuation of the alliance on the basis of athlete excellence. Kellogg selected Phelps as a role model and used his image on their cereal boxes. Phelps’ illegal behavior destroyed his image as a role model and thus any brand equity he might contribute to the alliance. Firms may choose a property for more diverse reasons for their ability to connect with a targeted minority on education, ethnicity or economic background. The spokesperson risk to the sponsorship alliance may be defended as long as the athlete remains successful in their primary function.

Crisis Prevention: Ongoing risk assessment of property

Farrelly and Quester’s (2005) findings that alliances are over-reliant on trust have significant risk management consequences for sponsorship alliances. Trust may be an important factor in the ongoing alliance relationship; however, times of crisis assume this trust has been breached, thus compromising the foundations of the alliance.

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Choosing an athlete property with strong reputational value is not an adequate risk management strategy. Woods had an exemplary image, which made the negative spokesperson event both more unexpected and arguably more damaging. For instance, Gatorade failed to perceive any risk when associating its marketing tag line “Is it in you?” with the Tiger Woods brand. Gatorade marketers did not perceive the tag line (which had been successful since 1999 (Advertolog 2010a)) to be a risk, particularly given its association with the popular and to date, trustworthy Woods. The tag line effectively forced Gatorade to terminate both the new product and alliance, representing a significant loss of funds invested into research, development, marketing and sales.

This reinforces the risks of over-reliance on trust in the athlete property, and the importance of establishing contingency risk management strategies in addition to athlete property selection. In particular, it is essential to maintain ongoing and comprehensive risk assessments of the sports property. Firms must consider the risk posed by and to the sponsorship alliance, as well as the behavior of the athlete alliance partner at regular intervals.

Crisis Recommendation: Public vs. Private Incorporation

The second key finding distinguishing the crisis response of firms is their form of incorporation. Public and private firms behaved differently, suggesting that private firms are better equipped to weather the storm of athlete misdemeanors. This is not to suggest that private firms are not answerable to shareholders, but that the volatility resulting from spokesperson risk is not played out on the stock market minimizing losses to shareholder value. Private firms, to be clear, must announce their intentions for the sponsorship alliance to the market in order to protect brand equity. However, the brand crisis faced is not compounded by the need to halt immediate shareholder losses such as is the case with publicly listed firms (such as BP and Exxon which had to act immediately to stem the losses to shareholders- refer to Figure 5 in Appendix). Across both case studies all private sponsor firms retained their sponsorship alliance, whilst the terminating corporations were all publicly traded (see Table 1).

Crisis Prevention Recommendation: Create an in-house athlete manager

Outsourcing risk management creates risk. Therefore, the firm should consider employing an in-house athlete manager who is tied to the strategic goals of the alliance. The addition of this management role would serve to help the firm maximize its brand equity in times of prosperity and protect it during crisis. This athlete manager would be responsible for ensuring the athlete is informed of the goals of the alliance, thus supporting the firm’s objectives for the alliance by achieving targeted key performance indicators. However, in the times of a crisis, the in-house athlete manager would be critical in protecting the firm’s

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interests within the alliance, in contrast to the athlete’s personal agent whose first loyalty is to the athlete. The reliability of information from the athlete’s agent is compromised by this desire to renegotiate a contract and can further damage the trust between athlete and firm. An in-house athlete manager would not only mitigate this risk, but also ensure consistent communications between athlete property, consumer firm and external agents and – if the firm chooses to maintain the alliance – facilitate rebuilding the trust in the alliance.

Crisis Prevention Recommendation: Redefine athlete performance

Athlete selection is an important factor in a sponsorship alliance. However, the firm should consider re- defining athlete’s performance to incorporate good behavior. This is particularly important if the athlete has a history of bad behavior or is utilized by the firm as a role model. For example Speedo offered Phelps’ a $1 million bonus for beating Spitz’s record of 7 Olympic medals at an Olympics (Abrahamson, 2008). Speedo could have adjusted this bonus to incorporate a good behavior bonus if the star avoided negative publicity. By rewarding the star for good behavior, it reiterates the importance the company places on the athlete’s conduct and incentivizes the athlete to both perform and behave within the bounds determined by the firm.

Contractual Termination: Escape but at what cost?

Sponsorships containing morality clauses are limited in their effectiveness and only provide an exit strategy for the firm. This may be seen as vital in the face of highly damaging PR as the firm seeks to distance itself. However, this ignores two factors.

Firstly, morality clauses are difficult to execute, particularly in the event of a court case or legal charges (Gibeaut, 2010). The accused is presumed innocent until guilty. Basketballer Kobe Bryant was arrested and accused of rape on 2 nd July 2003, and the court case was dismissed fourteen months later (NBC, 2004). The time lag associated with criminal cases can be particularly lengthy and damaging rendering it an insufficient firm strategy.

Secondly, firms should not rely overly on a legal contract and this exit strategy should be the last resort. Legal contract including termination clauses ignores the sunk costs and brand equity already developed as a result of the sponsorship relationship. For example, Tiger Woods and Nike remain synonymous thus making any alliance termination undesirable for either party. The strong associations consumers have

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between Tiger and Nike remain strong and it is unlikely that any other golf firm would wish to take on the golfer, and for the firm the sunk costs of endorsement contracts represents a significant investment.

Since athlete endorsement contracts represent a significant value and sunk cost to the firm, managers must therefore consider the long-term costs of terminating the alliance in response to short-term spokespeople crises. If they decide the athlete property retains value, managers must consider engaging in steps to rebuild this trust, recover this sunk cost of the contract value, and rebuild the relationship if this is in the strategic interests of the firm. It may also be a pertinent time to re-negotiate the contract value to the firms’ advantage.

Crisis Recommendation: Make a statement

Firms dependent upon sponsorship alliances should consider selecting an athlete with a propensity to co- operate with the media. In times of crisis a public statement of apology may be helpful in reducing stock volatility and limiting negative abnormal returns. The cumulative abnormal returns calculated for sponsor firms of Michael Phelps and Tiger Woods yield some interesting differences following the athletes’ public apologies (Day 6 for Phelps, and Day 15 for Woods). It is interesting to note the volatility experienced by Woods’ key sponsors; Pepsi, EA games and Nike, in the lead up to Woods’ public apology on Day 15 (refer to Appendix Figure 2).

Making a statement gives the firm power over its brand equity. PepsiCo. (Gatorade) made a statement terminating the alliance on Day 12. By communicating its intention to the market prior to Woods’ apology, or making a pre-emptive strike, PepsiCo appears to have reduced volatility in abnormal returns. By Day 16 AT&T communicated it was reviewing the alliance with woods. On Day 17 EA games announced it would retain Woods, while Accenture made a statement announcing its decision to terminate their alliance with Woods. Firms must make a statement either preemptively or in reaction to the crisis event in order to experience a positive abnormal returns.

The data consistently reveals an immediate spike for the companies after a statement was made. For example Visa’s pre-apology statement reaffirming its commitment to the alliance with Phelps (Day 4), and Kellogg’s statement to terminate the alliance (Day 7) all generated positive abnormal returns for the firm (Figure 1). Similarly PepsiCo following their statement of termination (Day 12) and NIKE reaffirming their commitment to Woods (Day 15) yielded positive abnormal returns. It should be noted that there is considerable volatility in the abnormal returns over this period, due largely to the turbulent financial

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markets in February 2009. However, this trend in the data supports the hypothesis that a statement of any form ameliorates the impact of a negative spokesperson event.

AREAS FOR FURTHER RESEARCH

Further research into the network of firms sharing a multi-brand asset would be particularly relevant to the literature on sponsorship alliances. Such research could assist firms in this network to better understand how the delay in responding to a spokesperson crisis impacts share price. Quantitative analysis into the volatility would be especially illuminating. It would also be rewarding to conduct a broad, quantitative study comparing how public and private firms respond to spokesperson crisis. This would support or refute the hypothesis that publically traded firms are more likely to terminate a sponsorship alliance than private firms. Such a study would provide interesting insights into the influence of media over shareholders and stock markets, and may affect how managers choose to manage athlete property risk.

CONCLUSION

Athlete properties can increase brand equity, release earnings potential and increase brand awareness. However, spokespeople also have the potential to inflict serious reputational damage through their actions which are inherently unpredictable and control over the brand message is to some extent unavoidably outsourced. This uncertainty poses considerable challenges to managers of consumer firms engaged in sponsorship alliances. Internalising the risk management function of athlete properties is essential as athlete agents are conflicted as a result of their remuneration structure which is tied to the athlete. Therefore, management attitudes suggesting such risks are ‘a cost of doing business’ are irresponsible and should not be tolerated by shareholders in the long term, particularly given the increasing investment in sponsorship as a form of marketing. Firms must be seen to take preventative measures to protect their investment.

It appears that the selection of an athlete property for their sporting success allows the firm to justify the alliance in the face negative spokesperson events. However, consumer firms must take care when selecting athletes as ‘role models’. The firm must be consistent in holding its properties to prescribed moral standards to avoid claims of hypocrisy. Private firms may be more capable of weathering brand

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crises as a result of morally questionable behavior because they are not publicly answerable to shareholders. However, further quantitative analysis is needed to test this hypothesis.

Firms must identify and evaluate their exposure to sponsorship risks and take preventative action to protect shareholders. Morality clauses, good behavior bonuses and employing an in-house athlete manager can serve to protect the firm’s investment and reduce the unsystematic nature of sponsorship risk. By establishing clear expectation and consequences a manager can react quickly to a crisis to create certainty. This in turn reduces volatility and protects shareholder value, minimizing risk for an investor. In this way sponsorship of athlete properties can remain an effective and attractive marketing tool for both managers and investors.

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APPENDIX

Figure 1 The daily abnormal returns (% swing from previous day) for Visa & Kellogg in the fortnight after Michael Phelps' negative spokesperson event

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Figure 2- The daily abnormal returns (% swing from previous day) for EA Games, Pepsi, and Nike following Tiger Wood’ negative spokesperson event

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Figure 3 Cumulative Abnormal Returns Data for Phelps’ & Woods’ Sponsor firms (Data for Wood’s firms sourced from (Knittel and Stango, 2009), remaining data from Google finance, 2009

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Figure 4- Timeline of Events in the Tiger Woods Scandal (Vale, 2010;, & ESPN 2010c)

27 November 2009

Tiger Woods is injured in a car accident, hitting a fire hydrant and a tree in his driveway in Orlando, Florida. US gossip websites speculate that the incident may be connected to reports in the National Enquirer alleging Woods had an affair with a New York nightclub hostess, Rachel Uchitel

28 November 2009

Florida Highway patrol confirm they have been unable to speak to Woods, or his wife, Elin Nordegren, who was reported to have smashed the back window of Tiger's car with a golf club to pull her husband out of the car.

29 November 2009

Woods takes full responsibility for the incident, saying: "I'm human and I'm not perfect. Many false and malicious rumours circulating about my family and me are irresponsible."

30 November 2009

Florida Highway Patrol reveals they have still to speak to the golfer who pulls out of his own Chevron World Challenge tournament. The following day Woods receives a traffic citation for careless driving and is issued with a $164 fine.

2 December 2009

US Weekly magazine publishes an interview with a cocktail waitress, Jaimee Grubbs, who claims to have had a 31-month affair with Woods. The golfer releases a statement saying: "I have let my family down and I regret those transgressions with all of my heart."

4-11 December 2009

Several other women claim to have had affairs with Tiger Woods, including a porn actress, a pancake house waitress and a Las Vegas club promoter.

8 December 2009

Barbro Holmberg, Woods' mother-in-law, is rushed to hospital in the early hours

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of the morning from his Florida mansion but is later discharged.

Sports drink firm Gatorade becomes first company to drop sponsorship of Tiger Woods.

11 December 2009

Woods announces he is taking an "indefinite break" from golf, apologises for his "infidelity" and says he will be focusing his "attention on being a better husband, father and person".

Accenture drops Woods' image off its Web site home page.

12 December 2009

AT&T reports it's evaluating the situation: "We are presently evaluating our ongoing relationship with him."

13 December 2009

Accenture says, "After careful consideration and analysis, the company has determined that he is no longer the right representative for its advertising."

Swiss watchmaker Tag Heuer says it is still with Woods. Company spokeswoman Mariam Sylla tells The Associated Press that the sale of its watches concerns his golf game, not his social life. "We will continue. He's the best in his domain. We respect his performance in the sport. [His] personal life is not our business."

EA Sports is still supporting Tiger, at least for now, according to New York Daily News.

14 December 2009

Nike Inc. chairman and co-founder Phil Knight says the scandal surrounding Woods is "part of the game" in signing endorsement deals with athletes and does not back away from the athletic shoe and clothing maker's relationship with the golfer.

16 December 2009

Wife Elin is seen is seen moving out with the children and goes to Sweden for Christmas. Media releases speculate that she is planning for divorce and that it

Page 23 of 28 ANZAM 2010

could cost Tiger $400m.

30 December 2009

Woods checks into a sex addiction clinic in Hattiesburg, Mississippi.

Telecommunications giant AT&T ends sponsorship agreement with Woods. The AT&T logo is on Woods' golf bag, and the company also hosts a midsummer PGA tournament for which Woods acts as official host.

21 January 2010

EA Sports officially announces it will release the "Tiger Woods PGA Tour 11" video game in June.

5 February 2010

Woods completes his stint on the Gentle Path rehabilitation programme and reportedly leaves with Elin, who has visited him at the clinic, to see his children.

16 February 2010

Joslyn James, a porn star, claims to have been one of Tiger Woods' many mistresses, saying she twice became pregnant, the first ending in a miscarriage, the other in an abortion. Both occurred at the same time as Woods' wife, Elin, was expecting his children Sam, now two, and Charlie, one, reports the Times.

19 February 2010

Woods addresses a small number of friends and associates at PGA headquarters in Florida apologising for his behavior.

27 February 2010

Gatorade confirms the end of its sponsorship association with Woods, following the termination of his deals with AT&T and Accenture.

9 March 2010

Rumours of an imminent return to golf gain ground as it emerges that Woods is back working with his long-time swing coach Hank Haney.

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13 March 2010

Fresh questions are raised about Woods' account of the car crash outside his home, after revelations that the ambulance crew refused to allow Elin into the ambulance because they thought it was a domestic violence case.

16 March 2010

Woods announces he will make his return to competitive golf at the Masters at Augusta, which begins on 8 April.

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Table 1- Outcome of Sponsorship Alliances following Crisis.

Kept Terminated Hold/ Scale Back Phelps Visa PUBLIC Kellogg PUBLIC Subway PRIVATE 2

Speedo PRIVATE Omega PRIVATE 3 Mazda PRIVATE Powerbar PRIVATE

Woods Nike Golf PUBLIC AT&T PUBLIC Gillete PUBLIC (P&G) EA Games PUBLIC Gatorade – PUBLIC PepsiCo. Tag Heur PRIVATE Accenture PUBLIC Tatweer PRIVATE (Golf Complex) Netjets PUBLIC (Fell) PGA Tour PRIVATE Partner

TLC Laser PUBLIC Eye Centres

2 Subway announced their sponsorship alliance with Michael Phelps on the 21 st of November 2009. The firm had not released any commercials prior to the crisis and the contract represented a significant sunk cost to Subway. Subway accepted Phelps’ apology and launched its first commercial starring Phelps five months after Phelps made his public apology, on 5 th July, 2009 3 Maza’s U.S. Subsidiary is privately held, whilst its parent company Mazda Inc is listed on the Tokyo Stock Exchange 24

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Figure 5- Share market losses to publicly traded firms in times of crisis (2010b)

Page 27 of 28 ANZAM 2010

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